UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2020

OR

For the transition period from               to              

Commission file number: 000-55603

 

Atlas Growth Partners, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: 800-674-2614

 

 

Former name, former address and former fiscal year, if changed since last report

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

Common units representing limited partner interests; warrants to purchase common units at an exercise price of $10.00 per common unit

(Title of class)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒      No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐     No  ☒

The number of outstanding common limited partner units of the registrant on August 12, 2020 was 23,300,410.

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

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ATLAS GROWTH PARTNERS, L.P.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

TABLE OF CONTENTS

 

 

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FORWARD-LOOKING STATEMENTS

The matters discussed within this report include forward-looking statements.  These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology.  In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report are forward-looking statements.  We have based these forward-looking statements on our current expectations, assumptions, estimates and projections.  While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control.  These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.  Some of the key factors that could cause actual results to differ from our expectations include:

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described under “Item 1A: Risk Factors” in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.  Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  The forward-looking statements included in this report are made only as of the date hereof.  We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of these statements to reflect future events or developments.

Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement.  This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

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ATLAS GROWTH PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

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ATLAS GROWTH PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

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ATLAS GROWTH PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

(in thousands, except unit and warrant data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

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ATLAS GROWTH PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

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ATLAS GROWTH PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

Atlas Growth Partners, L.P. (the “Company”) is a Delaware limited partnership and an independent developer and producer of natural gas, crude oil and NGLs with operations primarily focused in the Eagle Ford Shale in south Texas. Our general partner, Atlas Growth Partners GP, LLC owns 100% of our general partner units (which are entitled to receive 2% of the cash distributed by us without any obligation to make further capital contributions) and all of the incentive distribution rights through which it manages and controls us.

Through May 1, 2020, Atlas Energy Group, LLC (“ATLS”), a Delaware limited liability company, managed and controlled us through its 2.1% limited partner interest in us and its 80% member interest in our general partner. Current and former members of ATLS management owned the remaining 20% member interest in our general partner.

On May 1, 2020, pursuant to an Exchange Agreement by and among Riverstone Credit Partners – Direct, L.P. (“Riverstone”) and other lenders (collectively, the “Lenders”), ATLS and New Atlas Holdings, LLC (the “Borrower”, and together with ATLS and the other guarantors, the “Loan Parties”), ATLS transferred (the “Debt Exchange”) assets to the Lenders that included (i) its 80.01% membership interest in the general partner of the Company, and (ii) 500,010 common units representing limited partner interests in the Company. As of the date of the Debt Exchange, approximately $108,431,309 in principal amount of loans remained outstanding, which obligation was terminated in the Debt Exchange.  

As a result of the Debt Exchange and related transactions, Riverstone, in its capacity as a Lender, received an approximate 61% membership interest in our general partner, and, as a result, now has the ability to control the Company’s management and operations and appoint all of the members of the Board of Directors (the “Board”) of our general partner.

The interests of our Limited Partners are not affected, altered or otherwise modified by the Debt Exchange.

At June 30, 2020, we had 23,300,410 common limited partner units issued and outstanding.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting and include all adjustments that are necessary for a fair presentation of our condensed consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The condensed consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. For a more complete discussion of our accounting policies and certain other information, refer to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Principles of Consolidation

Our condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Transactions between us and other ATLS managed operations have been identified in the condensed consolidated financial statements as transactions between affiliates, where applicable. All intercompany transactions have been eliminated.

Beginning May 1, 2020, we have no continuing common ownership or corporate affiliation with ATLS and its affiliates. We will continue to identify any transaction between us and other ATLS managed operations as transactions between affiliates for all historical periods.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of our condensed consolidated financial statements, as well as the reported amounts of revenue and costs and expenses during the reporting periods. Our condensed consolidated financial statements are based on a number of significant

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estimates, including revenue and expense accruals and depletion of gas and oil properties. The oil and gas industry principally conducts its business by processing actual transactions as many as 60 days after the month of delivery. Consequently, the most recent two months’ financial results may be recorded using estimated volumes and contract market prices. Actual results may differ from those estimates.

Liquidity

For the six months ended June 30, 2020 and 2019, we had net losses of $6.4 million and $1.7 million, respectively, and cash used in operating activities of $0.8 million and cash provided by operating activities of $0.2 million, respectively. With the Company’s cash on hand, positive working capital, forecast of cash flows provided by operations, and planned spending reductions in general and administrative costs, we believe our resources will be sufficient to fund operations into 2021 and we will be able to continue as a going concern for one year.

Beginning in March 2020, significant price decline and price volatility for oil and gas products emerged in the market. We have been and could continue to be directly impacted by these price changes if the decline in demand and price remain depressed for an extended period of time. Given the volatility and uncertainty, we may be at risk of being able to identify and secure a party to gather and purchase our products. A significant number of our product sales are short-term in nature with contract terms of one year or less, though generally subject to customary evergreen clauses. To date, we have been able to sell our production and we continue to identify multiple purchasers.  However, should these parties become unwilling to purchase our production, we will need to work to identify other purchasers in the area to gather and purchase our oil and gas products. Failure to identify other purchasers and storage facilities, may result in the potential shut-in of the field. The financial statement impact, change in price and expected time for these changes is not estimable but could result in significant decreases in oil and gas operations.

 

Property, Plant and Equipment

Property, plant and equipment are stated at cost or, upon acquisition of a business, at the fair value of the assets acquired. Maintenance and repairs which generally do not extend the useful life of an asset for two years or more through the replacement of critical components are expensed as incurred. Major renewals and improvements which generally extend the useful life of an asset for two years or more through the replacement of critical components are capitalized. Depreciation and amortization expense is based on cost less the estimated salvage value primarily using the straight-line method over the asset’s estimated useful life. When entire pipeline systems, gas plants or other property and equipment are retired or sold, any gain or loss is included in our results of operations. 

We follow the successful efforts method of accounting for oil and gas producing activities. Exploratory drilling costs are capitalized pending determination of whether a well is successful. Exploratory wells subsequently determined to be dry holes are charged to expense. Costs resulting in exploratory discoveries and all development costs, whether successful or not, are capitalized. Geological and geophysical costs to enhance or evaluate development of proved fields or areas are capitalized. All other geological and geophysical costs, delay rentals and unsuccessful exploratory wells are expensed.

Our depletion expense is determined on a field-by-field basis using the units-of-production method. Depletion rates for leasehold acquisition costs are based on estimated proved reserves, and depletion rates for well and related equipment costs are based on proved developed reserves associated with each field. Depletion rates are determined based on reserve quantity estimates and the capitalized costs of undeveloped and developed producing properties. We also consider the estimated salvage value in our calculation of depletion. Capitalized costs of developed producing properties in each field are aggregated to include our costs of property interests in proportionately consolidated joint venture wells, wells drilled solely by us for our interests, properties purchased and working interests with other outside operators.

Upon the sale or retirement of a complete field of a proved property, the cost is eliminated from the property accounts, and the resultant gain or loss is reclassified to our condensed consolidated statement of operations. Upon the sale of an individual well, we credit the proceeds to accumulated depreciation and depletion within our condensed consolidated balance sheet. Upon our sale of an entire interest in an unproved property where the property had been assessed for impairment individually, a gain or loss is recognized in our condensed consolidated statements of operations. If a partial interest in an unproved property is sold, any funds received are accounted for as a reduction of the cost in the interest retained.

Support equipment and other are carried at cost and consist primarily of pipelines, processing and compression facilities, and gathering systems and related support equipment. We compute depreciation of support equipment and other using the straight-line balance method over the estimated useful life of each asset type, which is 15-20 years.

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Segment Reporting

We derive revenue from our gas and oil production. The production facilities associated with our oil and gas production have been aggregated into one reportable segment because the facilities have similar long-term economic characteristics, products and types of customers.

Revenue Recognition

 

On January 1, 2018, we adopted ASU No. 2014–09, Revenue from Contracts with Customers (the “new revenue standard”), using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. The adoption of the new revenue standard did not have a material impact on our condensed consolidated financial statements and no cumulative effect adjustment was recorded to beginning partners’ capital. As a result of adopting the new revenue standard, we disaggregated our revenues by product type on our condensed consolidated statements of operations for all periods presented.

Oil, Natural Gas, and NGL Revenues

 

Our revenues are derived from the sale of oil, natural gas, and NGLs, which is recognized in the period that the performance obligations are satisfied. We generally consider the delivery of each unit (Bbl or MMBtu) to be separately identifiable and the delivery of each unit represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer upon delivery to an agreed upon delivery point. Transfer of control typically occurs when the products are delivered to the purchaser and title has transferred. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to receive in exchange for those products. Payment is generally received one month after the sale has occurred.

 

Our oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, we generally record sales based on the net amount received.

 

Our natural gas production is primarily sold under market-sensitive contracts that are typically priced at a differential to the published natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. For natural gas contracts, we generally record wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the plant as revenues net of transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to us at the tailgate of the plant. Conversely, we generally record residual natural gas and NGL sales at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the processor is a service provider and there is redelivery of commodities to us at the tailgate of the plant. All facts and circumstances of an arrangement are considered and judgment is often required in making this determination.

 

Transaction Price Allocated to Remaining Performance Obligations

 

A significant number of our product sales are short-term in nature with contract terms of one year or less, though generally subject to customary evergreen clauses pursuant to which these contracts typically automatically renew under the same terms and conditions. For those contracts, we have utilized the practical expedient allowed in the new revenue standard that exempts us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

For product sales that have a contract term greater than one year, we have utilized the practical expedient that exempts us from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, our product sales that have a contractual term greater than one year have no long-term fixed consideration.

Contract Balances

Under our sales contracts, customers are invoiced once performance obligations have been satisfied, at which point our right to payment is unconditional. Accordingly, our product sales contracts do not give rise to contract assets or liabilities. Accounts receivable attributable to our revenue contracts with customers was $0.3 million and $0.5 million, respectively, at June 30, 2020 and December 31, 2019.

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Net Loss Per Common Unit

Basic net loss attributable to common limited partners per unit is computed by dividing net loss attributable to common limited partners (which is determined after the deduction of the general partner’s interest) by the weighted average number of common limited partner units outstanding during the period.

The following is a reconciliation of net loss allocated to the common limited partners for purposes of calculating net loss attributable to common limited partners per unit (in thousands):

 

 

Diluted net loss attributable to common limited partners per unit is calculated by dividing net loss attributable to common limited partners by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of common limited partner warrants, as calculated by the treasury stock method.

The following table sets forth the reconciliation of our weighted average number of common units used to compute basic net loss attributable to common limited partners per unit with those used to compute diluted net loss attributable to common limited partners per unit (in thousands):

 

 

 

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment at the dates indicated (in thousands):

 

 

For the six months ended June 30, 2020, we recognized $4.0 million of impairment related to our proved oil and gas properties in the Eagle Ford operating area, which were impaired due to lower forecasted production performance and commodity prices. There was no impairment recorded during the quarter ended June 30, 2020 or the three and six month period ended June 30, 2019. During the six months ended June 30, 2020 and 2019, we did not have any non-cash investing activity capital expenditures.

 

NOTE 4 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

On June 19, 2020, affiliates of Titan (as defined below) closed on the sale of their Eagle Ford Shale assets with Texas American Resources Corporation II (“TARC”) for $13.2 million based on a May 1, 2020 effective date. In connection with the transaction, we entered into a contract operator agreement with TARC, whereby TARC will operate certain oil and gas properties and will provide other services to the Company related to our properties.

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On May 1, 2020, pursuant to an Exchange Agreement by and among the Lenders and the Loan Parties, ATLS transferred assets to the Lenders that included (i) its 80.01% membership interest in the general partner of the Company, and (ii) 500,010 common units representing limited partner interests in the Company. As of the date of the Debt Exchange, approximately $108,431,309 in principal amount of loans remained outstanding, which obligation was terminated in the Debt Exchange.

As a result of the Debt Exchange and related transactions, Riverstone, in its capacity as a Lender, received an approximate 61% membership interest in our general partner, and, as a result, now has the ability to control the Company’s management and operations and appoint all of the members of the Board of our general partner.

The interests of Limited Partners of the Company are not affected, altered or otherwise modified by the Debt Exchange.

Relationship with general partner. Our general partner receives an annual management fee in connection with its management of us equivalent to 1% of capital contributions per annum. During both of the three months ended June 30, 2020 and 2019, we paid a management fee of $0.6 million to our general partner and during both of the six months ended June 30, 2020 and 2019 we paid a management fee of $1.1 million, respectively, to our general partner. As of June 30, 2020, we had payables of $0.6 million related to the management fee which were recorded in accrued liabilities in the condensed consolidated balance sheets.

Relationship with ATLS. We do not directly employ any persons to manage or operate our business. These functions were historically provided by employees of ATLS and/or its affiliates, including Titan Energy, LLC (“Titan”). Our general partner receives an annual management fee in connection with its management of us equivalent to 1% of capital contributions per annum. Other indirect costs, such as rent for offices, are allocated by Titan at the direction of ATLS based on the number of its employees who devoted their time to activities on our behalf. Historically, we reimbursed ATLS at cost for direct costs incurred on our behalf and all necessary and reasonable costs allocated to us by ATLS. All of the costs paid or payable to ATLS and our general partner discussed above were included in general and administrative expenses – affiliate in the condensed consolidated statements of operations. As of June 30, 2020 and December 31, 2019, we had no payables to ATLS related to the management fee, direct costs or allocated indirect costs, which were recorded in advances from affiliates in the condensed consolidated balance sheets. Beginning May 1, 2020, we have no continuing common ownership or corporate affiliation with ATLS and its affiliates.

Relationship with Titan. Prior to May 1, 2020, at the direction of ATLS, we reimbursed Titan for direct costs, such as salaries and wages, charged to us based on ATLS employees who incurred time to activities on our behalf and indirect costs, such as rent and other general and administrative costs, allocated to us based on the number of ATLS employees who devoted their time to activities on our behalf. As of June 30, 2020 and December 31, 2019, we had receivables from Titan of zero and $0.5 million, respectively, related to the direct costs, indirect cost allocation, and timing of funding of cash accounts for reimbursement of operating activities and capital expenditures, which were recorded in advances to/from affiliates in the condensed consolidated balance sheets. Beginning May 1, 2020, we have no continuing common ownership or corporate affiliation with ATLS and its affiliates.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

General Commitments

As of June 30, 2020, certain of our executives are parties to employment agreements that provide compensation and certain other benefits to such executives. The agreements provide for severance payments under certain circumstances.

As of June 30, 2020, we did not have any commitments related to our drilling and completion and capital expenditures.

Legal Proceedings

We and our subsidiaries are parties to various routine legal proceedings arising in the ordinary course of business. Our management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Environmental Matters

We and our subsidiaries are subject to various federal, state and local laws and regulations relating to the protection of the environment. We have established procedures for the ongoing evaluation of our and our subsidiaries’ operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. We and our subsidiaries maintain insurance which may cover in whole or in part certain environmental expenditures. We and our subsidiaries had no environmental matters requiring specific disclosure or requiring the recognition of a liability as of June 30, 2020 and December 31, 2019.

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BUSINESS OVERVIEW

Atlas Growth Partners, L.P. (the “Company”) is a Delaware limited partnership and an independent developer and producer of natural gas, crude oil and NGLs with operations primarily focused in the Eagle Ford Shale in south Texas. Our general partner, Atlas Growth Partners GP, LLC owns 100% of our general partner units (which are entitled to receive 2% of the cash distributed by us without any obligation to make further capital contributions) and all of the incentive distribution rights through which it manages and controls us.

Through May 1, 2020, Atlas Energy Group, LLC (“ATLS”), a Delaware limited liability company, managed and controlled us through its 2.1% limited partner interest in us and 80% member interest in our general partner. Current and former members of ATLS management owned the remaining 20% member interest in our general partner.

On May 1, 2020, pursuant to an Exchange Agreement by and among Riverstone Credit Partners – Direct, L.P. (“Riverstone”) and other lenders (collectively, the “Lenders”), ATLS and New Atlas Holdings, LLC (the “Borrower”, and together with ATLS and the other guarantors, the “Loan Parties”), ATLS transferred (the “Debt Exchange”) assets to the Lenders that included (i) its 80.01% membership interest in the general partner of the Company, and (ii) 500,010 common units representing limited partner interests in the Company. As of the date of the Debt Exchange, approximately $108,431,309 in principal amount of loans remained outstanding, which obligation was terminated in the Debt Exchange.

As a result of the Debt Exchange and related transactions, Riverstone, in its capacity as a Lender, received an approximate 61% membership interest in our general partner, and, as a result, now has the ability to control the Company’s management and operations and appoint all of the members of the Board of Directors (the “Board”) of our general partner.

The interests of Limited Partners of the Company are not affected, altered or otherwise modified by the Debt Exchange.

In connection with and following the Debt Exchange, our general partner appointed Christopher Abbate, Daniel Flannery and Jack Maleh to serve as directors on the Board (collectively, the “New Directors”) replacing each of the previous directors of our general partner. The New Directors terms as directors began on May 1, 2020 and the former directors resignations were effective on May 1, 2020.

In connection with and following the Debt Exchange, our general partner appointed Jeffrey Slotterback, its previous Chief Financial Officer, to serve as Chief Executive Officer in addition to serving as Chief Financial Officer, and Christopher Walker, its previous Chief Operating Officer, will serve in that capacity (collectively, the “New Officers”) going forward. The respective terms of the New Officers as officers began on May 1, 2020 and the previous officers resignations were effective on May 1, 2020.

We anticipate further reductions in general and administrative expenses following the Debt Exchange and the appointment of the New Officers.

On June 19, 2020, affiliates of Titan closed on the sale of their Eagle Ford Shale assets with Texas American Resources Corporation II (“TARC”) for $13.2 million based on a May 1, 2020 effective date. In connection with the transaction, we entered into a contract operator agreement with TARC, whereby TARC will operate certain oil and gas properties and will provide other services to the Company related to our properties. We anticipate the TARC contract operator agreement will further reduce our general and administrative expenses.

MANAGEMENT OVERVIEW AND OUTLOOK

Since our inception in 2013, we have developed into a company with a core position in the Eagle Ford Shale in south Texas. While the energy markets continue to be marked by volatility, we are focused on refining our operations to reduce expenses. At June 30, 2020, we had $1.4 million of cash on our balance sheet and no debt.

While we manage the Company on a daily basis to optimize operating results, we also continue to explore ways to strategically grow and transform the Company. Quarterly, we consider our ability to make distributions to unitholders; however, based on the Company’s financial position and cash flows, we have not yet elected to resume making distributions following the suspension in November 2016. We continue to explore opportunities to drill additional wells across our Eagle Ford Shale locations. Our ability to convert our locations into cash-flowing wells may be improved by raising additional capital, but we have limited avenues to do so at this time. We continue to evaluate the most attractive way to accelerate growth of our portfolio and drive value to all of our equity holders. We will continue to vigorously pursue all options to maximize returns to our investors.

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GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in natural gas and oil production markets. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

Since 2017, the natural gas, oil and natural gas liquids commodity price markets have been marked by volatility. While we anticipate high levels of exploration and production activities over the long-term in the areas in which we operate, fluctuations in energy prices can greatly affect production rates and investments in the development of new natural gas, oil and NGL reserves. The economics of drilling new oil wells across our acreage position in the Eagle Ford Shale in south Texas have improved over the past few years, driven by both a rise in oil prices, as well as significant advancements in drilling and completion technology.

Beginning in March 2020, significant price decline and price volatility for oil and gas products emerged in the market. We have been and could continue to be directly impacted by these price changes if the decline in demand and price remain depressed for an extended period of time. Given the volatility and uncertainty, we may be at risk of being able to identify and secure a party to gather and purchase our products. A significant number of our product sales are short-term in nature with contract terms of one year or less, though generally subject to customary evergreen clauses. To date, we have been able to sell our production and we continue to identify multiple purchasers.  However, should these parties become unwilling to purchase our production, we will need to work to identify other purchasers in the area to gather and purchase our oil and gas products. Failure to identify other purchasers and storage facilities, may result in the potential shut-in of the field. The financial statement impact, change in price and expected time for these changes is not estimable but could result in significant decreases in oil and gas operations.

Our future gas and oil reserves, production, cash flow, our ability to make payments on our obligations and our ability to make distributions to our unitholders, depend on our success in producing our current reserves efficiently, developing our existing acreage and acquiring additional proved reserves economically. We face the challenge of natural production declines and volatile natural gas, oil and NGL prices. As initial reservoir pressures are depleted, natural gas and oil production from particular wells decrease. We attempt to overcome this natural decline by drilling to find additional reserves and acquiring more reserves than we produce. To the extent we would not have access to sufficient capital, our ability to drill and acquire more reserves would be negatively impacted.

RESULTS OF OPERATIONS

Gas and Oil Production

Production Profile. We have established production positions in the following areas:

Production Volumes. The following table presents total net natural gas, crude oil and NGL production volumes and production volumes per day for the periods indicated:

 

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Production Revenues, Prices and Costs. Production revenues and estimated gas and oil reserves are substantially dependent on prevailing market prices for oil. The following table presents our production revenues and average sales prices for our natural gas, oil, and NGL production, along with our average production costs, which include lease operating expenses, taxes, and transportation and compression costs, for the periods indicated:

 

 

Our oil and gas production revenues were lower in the current quarter as compared to the prior year period due to a $1.1 million decrease due to lower realized average oil sales prices and a $0.5 million decrease in oil production volumes. Our oil and gas production revenues were lower in the six months ended June 30, 2020 as compared to the prior year period due to a $1.3 million decrease due to lower realized average oil sales prices and a $1.2 million decrease in oil production volumes. As a result of the current economic conditions, the Company entered into agreements to sell May and June production at a fixed price for a fixed volume which negatively impacted our sold oil production volumes and realized average oil sales price.

 

Our oil and gas production costs were lower in the current quarter as compared to the prior year period due to a $0.4 million decrease in production costs resulting from lower volumes. Our oil and gas production costs were lower in the six months ended June 30, 2020 as compared to the prior year period due to a $0.5 million decrease in production costs resulting from lower volumes.

OTHER EXPENSES

 

 

General and Administrative Expenses. The increase in general and administrative expenses for the current quarter and the six months ended June 30, 2020 as compared to the prior year periods were due to certain one-time charges associated with our separation from ATLS.

Depreciation, Depletion and Amortization. The decrease in depreciation, depletion and amortization in the current quarter and the six months ended June 30, 2020 as compared to the prior year periods was primarily due to decreases in our depletion expense resulting from asset impairments recorded in previous periods, which lowered our depletable base, and lower production volumes.

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Asset impairment. For the six months ended June 30, 2020, we recognized $4.0 million of impairment related to our proved oil and gas properties due to lower forecasted commodity prices.

Gain on asset sales. In January 2019, we sold our Marble Falls position, which resulted in a gain of $20 thousand after customary purchase price adjustments.

LIQUIDITY AND CAPITAL RESOURCES

General

We currently fund our operations through cash on hand and cash generated from operations. Our future cash flows are subject to a number of variables, including oil and natural gas prices.

As of June 30, 2020, we had $1.4 million of cash on our balance sheet and no debt.

Cash Flows

 

 

Six Months Ended June 30, 2020 Compared with the Six Months Ended June 30, 2019

Cash Flows from Operating Activities:

The change in cash flows (used in) provided by operating activities compared with the prior period was due to a $1.0 million decrease in net cash provided by operating activities from cash receipts and disbursements attributable to our normal monthly operating cycle for gas and oil production revenues, and collections net of payments for royalties, lease operating expenses, severance taxes and general and administrative expenses coupled with certain one-time charges associated with our separation from ATLS.

Capital Requirements

As of June 30, 2020, we did not have any material accrued well drilling and completion and capital expenditures.

OFF BALANCE SHEET ARRANGEMENTS

There have been no material changes to our off balance sheet arrangements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

There have been no material changes to our contractual obligations and commercial commitments outside the ordinary course of our business from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a more complete discussion of the accounting policies and estimates that we have identified as critical in the preparation of our condensed consolidated financial statements, please refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in interest rates and commodity prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonable possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of the market risk-sensitive instruments were entered into for purposes other than trading.

General

All of our assets and liabilities are denominated in U.S. dollars, and as a result, we do not have exposure to currency exchange risks.

We are exposed to various market risks, principally changes in commodity prices. These risks can impact our results of operations, cash flows and financial position. We may manage these risks through regular operating and financing activities and periodic use of derivative financial instruments such as forward contracts and swap agreements. As of June 30, 2020, we did not have any commodity derivatives outstanding. The following analysis presents the effect on our results of operations, cash flows and financial position as if the hypothetical changes in market risk factors occurred on June 30, 2020. Only the potential impact of hypothetical assumptions was analyzed. The analysis does not consider other possible effects that could impact our business.

Commodity Price Risk. Our market risk exposures to commodities are due to the fluctuations in commodity prices and the impact those price movements have on our financial results. For the three months ended June 30, 2020, we did not have any commodity derivatives outstanding.

Holding all other variables constant, a 10% change in average commodity prices would result in a change to our net loss for the twelve-month period ended June 30, 2020 of $0.4 million.

Realized pricing of natural gas, oil, and NGL production is primarily driven by the prevailing worldwide prices for crude oil and spot market prices applicable to United States natural gas, oil and NGL production. Pricing for natural gas, oil and NGL production has been volatile and unpredictable for many years.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to management (including the principal executive and financial officers) as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of June 30, 2020.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC, other than the risks described below:

The ongoing COVID-19 outbreak and the related impact on oil and natural gas prices have adversely affected, and could continue to adversely affect, our business, financial condition and results of operations.

The ongoing COVID-19 outbreak, which the WHO declared a pandemic and the United States Government declared a national emergency in March 2020, has reached more than 200 countries and has continued to be a rapidly evolving situation. The pandemic has resulted in widespread adverse impacts on the global economy and financial markets and we and our operators and other parties with whom we have business relations have experienced some resulting disruptions to our and their business operations. For example, since mid-March, we have had to limit access to our administrative offices and have taken certain other precautionary measures intended to help minimize the risk to our employees, our business and our community. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns.  In addition, our employees are now working remotely, which could increase the risk of security breaches or other cyber-incidents or attacks, loss of data, fraud and other disruptions.

The impact of the pandemic, including the resulting significant reduction in global demand for oil and, to a lesser extent natural gas, coupled with the sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of OPEC and other foreign, oil-exporting countries, is expected to lead to significant global economic contraction generally and in our industry in particular.  Oil and natural gas prices are expected to continue to be volatile as a result of these events and the ongoing COVID-19 outbreak, and as changes in oil and natural gas inventories, industry demand and economic performance are reported. The current price environment has caused some of our operators’ wells to become uneconomic, which has resulted, and may result in the future, in suspension of production from those wells or a significant reduction in, existing production. Some operators may also attempt to shut in producing wells and avoid lease termination or payment of shut-in royalties by claiming force majeure, if provided for in the applicable lease. The curtailment of production or the shut-in of wells as a result of the ongoing COVID-19 outbreak and the drop in oil prices are both outside of our control, and the materialization of either circumstance could have a significant impact on our result of operations. We may receive notices regarding well shut-ins and curtailments of production from our operators as reductions in global demand for oil and natural gas resulting from the COVID-19 outbreak and depressed oil prices resulting from the OPEC decisions each continue and as oil storage facilities reach capacity and/or purchasers of crude products cancel previous orders as a result.

Due to the recent significant decline in oil and natural gas prices, as well as longer-term commodity price outlooks related to reduced demand for oil and natural gas as a result of the COVID-19 pandemic and other supply factors, we have recorded an impairment on our oil and natural gas properties for the three months ended March 31, 2020. If the expected significant decline in the price of oil, natural gas and NGLs continues through future periods or if prices decrease further in future periods, we may be required to record additional impairments.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments beyond our control, which are highly uncertain and cannot be predicted, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, future actions taken by members of OPEC and other foreign oil-exporting countries, actions taken by governmental authorities, our operators and other third parties and the timing and extent to which normal economic and operating conditions resume.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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